SC ECON 224 - Final Exam Study Guide (27 pages)

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Final Exam Study Guide

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Final Exam Study Guide


Study Guide
University Of South Carolina-Columbia
Econ 224 - Intro to Economics
Intro to Economics Documents
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ECON 224 1st Edition Final Exam Study Guide This study guide is separated into the different modules that will be covered on the Final Exam GDP and Economic Growth Gross Domestic Product GDP Measures the total income of everyone in the economy GDP also measures total expenditures on the economy s output of goods and services For the economy as a whole income equals expenditure because every dollar a buyer spends is a dollar of income for the seller Why is GDP Important GDP is used in three different ways o Explore short run fluctuations in the business cycle o Show and compare standards of living across countries Ex US compared to European countries o Explore long run economic growth Overtime how has our income changed Gross Domestic Product GDP Is the market value of all final goods and services produced within a country in a given period of time Market value goods are valued at their market prices so o All goods measured in the same units ex dollars in the U S o Things that don t have a market value are excluded Ex housework you do for yourself Anything you do for yourself does not have market value If you pay someone else to do it that would be included Final goods intended for the end user o Intermediate goods used as components or ingredients in the production of other goods Not the last user if I use it to produce something else in the future not included in GDP Ex Buy lettuce to make a salad sell the salad and charge consumer for salad o GDP only includes final goods they already embody the value of the intermediate goods used in their production GDP includes tangible goods like DVDs mountain bikes beer and intangible services dry cleaning concerts cell phone service GDP includes currently produced goods not goods produced in the past o Usually a year or a quarter 3 months GDP measures the value of production that occurs within a country s borders whether done by its own citizens or by foreigners located there Avoiding Multiple Counting Excludes financial transactions o Public transfer payments Welfare and Social Security Do not count any payments government makes because that is not the final use of that payment people then take that money to buy goods and services o Private transfer payments inheritances o Stocks and bond market transactions Excludes secondhand sales o Used car market person who originally bought the car is already included in GDP Society is not benefited by you buying a new car Reselling a car would be considered double counting o Craigslist EBay etc Excludes items produced in a previous year o Not in given time period o Only include items produced this year want to know how productive we are this year Measuring GDP RECALL GDP is total spending Four components o Consumption C you as a household What goods and services are YOU buying o Investment Ig Capital goods we are going to use to produce more goods and services in the future Ex hammer for construction job will use it to build houses in the future o Government Purchases G Cars airplanes President s hair cut o Net Exports Xn Anything made in US consumed abroad Anything consumed in US produced abroad o These components add up to GDP GDP C Ig G Xn Personal Consumer Expenditures Total spending by households on goods and services Note on housing costs o For renters consumption includes rent payments o For homeowners includes the opportunity cost of renting their own home the implicit cost of their house Do not consume the whole benefit of the house in one month Investment Ig Total spending on goods that will be used in the future to produce more goods Includes spending on o Capital equipment machinery and tools o Construction factories office buildings HOUSES Look at how much of the construction is done during the given year Construction is a process that happens overtime often takes more than a year o Inventories goods produced but not yet sold Note Investment does not mean the purchase of financial assets like stocks and bonds Government Purchases G All spending on goods and services purchased by the government at the Federal State and Local Levels Excludes transfer payments o Citizens will use those payments for goods and services would double count o Not directly purchasing goods and services Net Exports Xn Exports Imports Exports represent foreign spending on the economy s goods and services Imports are counted in other portions of the GDP C I and G Quick Question Does the following case effect GDP Which Component Debbie spends 200 to buy her husband dinner at the finest restaurant in Boston A Consumption B Investment C Government Spending D Net Exports Consumption this is a household consuming a good or service Quick Question 2 Sarah spends 1 800 on a new laptop to use in her publishing business The laptop was built in China A Consumption B Investment C Government Spending D Net Exports E Net Exports and Investment Investment She will use it to produce more in the future Net Exports the United States was not productive since the laptop was not made in the US Quick Question 3 Jane spends 1 200 on a computer to use in her editing business She got last year s model on sale for a great price A Consumption B Investment C Government Spending D Net Exports and Investment E No Effect It would be an investment but she bought last years model so there is no effect this year Quick Question 4 General Motors builds 500 million worth of cars but consumers buy only 470 million worth of them A Consumption B Investment C Government Spending D Net Exports E Consumption and Investment 470 million consumption What happens to cars that are sitting there Inventory list Under investments Consumption and Investment Total Effect 500 million how productive US was this year The rest will sit on the lot until next year which falls under investment Nominal GDP versus Real GDP Inflation can distort economic variables like GDP we have two versions of GDP One is correct for inflation the other is not Nominal GDP values output using current prices o Not correct for inflation Real GDP values output using the prices of a base year o Soda costs 50 cents in 1983 and calculate GDP for every year before and after that year to look at how output changes o Corrected for inflation Inflation General rise in the price level o All prices in the economy are increasing o The dollar is worth less than it was in the previous year o Can buy fewer US goods and services with each dollar Inflation reduces the purchasing power of money o How much

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